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What’s the best way to tap into the nonferrous metals market? Physical metals or mining companies?

Which performs better?

There's no such a thing as a "pure play" mining company

Volatility vs. returns

Base metals aren’t glamorous, but as you will remember from HardAssetsInvestor.com’s piece on “industrial metals” last November, they have performed very, very well recently. In fact, base metals have been the best-performing commodities sector over the past 3-, 5- and 10-year periods.

For investors, however, the question remains how best to gain exposure to metals like aluminum, copper, nickel and zinc.

On the one hand there is investment in the metals themselves. On the other, there is investment in the mines that produce them. However, while it is always possible to invest in individual metals (even if only through futures on the world’s metals exchanges), it is not always possible to invest in mining companies producing only a single metal.

So, metal or mine?

Metal

As with an investment in any metal, owning physical base metals is always the purest play. For many, however, buying, say, primary aluminum on the London Metal Exchange may not be an option. Even though holding the physical metal itself will be no problem – ownership will be evidenced by a certified warehouse warrant – the cost of a single lot at $69,025 could be ($2,761/ton with a 25 ton contract, as of March 20, 2008).

Fortunately, as noted by Brad Zigler in his piece “Copper Getting Redder Ink-Wise,” for copper (and also for a number of other metals), “(i)nvestors and traders now have several alternatives to dealing in the futures market.”

These alternatives take the form of ETFs, ETNs and ETCs (traded in Europe, an Exchange Traded Commodity (“ETC”) is a secured, undated, zero-coupon note). Some of these provide pure play exposure to individual metals, while others provide exposure to individual metals as constituent members of a wider portfolio of commodities.

As Brad points out, for these instruments, spreads will largely be determined by liquidity. Of course, for the commodity baskets, sensitivity to any individual metal’s price movements will be a function of that metal’s weighting in the portfolio.

Among some of the purest alternative base metal plays globally are:

ETFs/ETNs/ETCs

BloombergTicker

Company

Index

Type

Metals (%)

Incep.

Net Assets

Avg Vol(3m)

JJC:US

iPath

DJ-AIG Copper Total Return

ETN

100% Cu

10/23/07

$15.9m

13,303

JJN:US

iPath

DJ-AIG Nickel Total Return

ETN

100% Ni

10/23/07

$6.7m

8,040

JJM:US

iPath

DJ-AIG Industrial Metals Total Return

ETN

(3/20/08)
37% Al
36% Cu
14% Zn
13% Ni

10/23/07

$33.1m

9,243

DBB:US

PowerShares

DB Industrial Metals

ETF

(3/21/08)
36% Al
36% Cu
28% Zn

1/5/07

$107.4m
(2/29/08)

135,942

ALUM:LN

ETF Securities

DJ-AIG Aluminum Sub-Index

ETC

100% Al

9/27/06

$41.1m
(2/13/08)

NA

COPA:LN

ETF Securities

DJ-AIG Copper Sub-Index

ETC

100% Cu

9/27/06

$23.1m
(2/13/08)

NA

NICK:LN

ETF Securities

DJ-AIG Nickel Sub-Index

ETC

100% Ni

9/27/06

$36.0m
(2/13/08)

NA

ZINC:LN

ETF Securities

DJ-AIG Zinc Sub-Index

ETC

100% Zn

9/27/06

$12.3m
(2/13/08)

NA

AIGI:LN

ETF Securities

DJ-AIG Industrial Metals Sub-Index

ETC

38% Al
32% Cu
15% Zn
15% Ni

9/27/06

$44.9m
(2/13/08)

NA

Sources: iPath, Deutsche Bank, etf Securities, Bloomberg and Yahoo!Finance
Unless otherwise stated figures are as at March 20 or March 21, 2008.

In addition to ETF Securities’ “long” base metal listed in the table above, the firm has also developed a number of other base metal-related ETCs, including a forward industrial metals ETC and a number of leveraged ETCs for individual metals. Of particular interest are the “short” ETCs, which are “designed to change each day by minus one times (-1x) the daily percentage change” in the relevant index (before fees and adjustments).

Therefore, for example, “if the DJ-AIG Aluminum Sub-Index falls (or rises) by 1% in one day, then ETFS Short Aluminium will rise (or fall) by 1%. In addition, an interest component is added each day to give a total return investment.”

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